With coal prices rising strongly this year, investors may be wondering how they can gain exposure to this booming commodity.
The good news is that Goldman Sachs has been looking at the industry and sees plenty of opportunities for investors with thermal and metallurgical coal.
Thermal coal
As its name implies, thermal coal is used predominantly for heating/electricity generation. It tends to be burned to create the steam that runs the turbines that ultimately generate electricity. Demand for non-Russian thermal coal looks set to underpin strong prices in 2022, according to the broker.
Goldman notes: "Our channel checks with industry participants (coal companies, traders, market assessors) suggest that some European & JKT utilities are already seeking to cut ties with Russian coal companies and tendering for South African, Colombian, Australian and Indonesian coal as a replacement, while Chinese traders remain cautious to import coal from Russia due to potential risks around letters of credit and deliverability."
And while the broker believes Indonesia has the potential to boost its supplies materially, it would require a government policy reversal on export quotas. Furthermore, its coal has a lower energy content and is unlikely to satisfy demand for higher calorific value coal.
In light of this and reflecting a potential increase in Chinese domestic production, Goldman has upgraded its price forecasts for benchmark thermal coal to US$250 a tonne in the first quarter and US$208 a tonne in 2022.
Metallurgical coal
Metallurgical coal is the type used in steel production. Goldman anticipates further tightening in the market if European steel mills look for alternatives to Russian production.
It explained: "We would expect markets to tighten further if European steel mills turn to US and Aus coal. If this were to occur it would coincide with rebounding Chinese steel production in 2Q. Furthermore, there are ongoing supply issues in Canada, the US, Mongolia, and Australia mostly due to a slow recovery from ongoing weather events."
As a result, it has upgraded its benchmark metallurgical coal price forecasts to US$440 a tonne for the first quarter and US$360 a tonne for the full year.
Which coal shares are in the buy zone?
Following its coal price forecast upgrades, Goldman has made changes to the valuations of some ASX mining shares.
It has retained its buy rating and lifted its price target on Coronado Global Resources Inc (ASX: CRN) shares by 33% to $2.80.
For South32 Ltd (ASX: S32) shares, the broker retains its conviction buy rating and lifts its price target by 5% to $5.90.
And for Whitehaven Coal Ltd (ASX: WHC) shares, Goldman has retained its buy rating and lifted its price target by 21% to $4.70.
